Beyond Grexit: Large Financial Storms Threaten Banks Worldwide

While all eyes have been fixed on banks in Greece and the “Grexit” situation (a Greek exit from the Eurozone) in recent weeks, many have overlooked a new crop of financial storms that have been brewing for banks in other countries around the world.

Banks in the US continue to face their own set of challenges. As I mentioned in aprevious post, larger banks have been plagued by shrinking interest margins in the near-zero interest-rate environment, heavy lawsuits stemming from the financial crisis, and shrinking mortgage businesses as fewer consumers have been refinancing.

In Brazil, banks are facing almost the complete opposite problem when it comes to interest rates. The country is now facing 8% inflation after several years of healthy economic expansion, which has prompted Brazil’s central bank to hike its main interest rate to a staggering 13.25%.

Brazil’s rich interest-rate environment has allowed large banks like Banco Bradesco (Latin America’s second-largest bank by market value) to reap the profitable rewards of 7%-plus net interest margins on every loan they make, compared to the paltry 1%-2% margins US banks collect. But economists expect the aggressive moves from the central bank will cause Brazil’s economy to shrink by 1% in 2015, which would represent the country’s deepest recession in 25 years.

Meanwhile in Spain, the economy has been struggling to come back from a two-year-long recession that ended in late 2013. Rather than taking out new loans, even in a US-like low interest-rate environment, many borrowers in Spain have been paying down their existing debts, leaving banks to fight over precious new loan opportunities with diminished interest margins. To protect their business, banks like Banco Bilbao Vizcaya Argentaria (BBVA), Spain’s second-largest bank, have been seeking more profitability in faster-growing markets like Mexico and the US.

Banks in Italy are arguably in the worst financial shape worldwide. With the country suffering from the longest recession on record (the economy hasn’t grown since the second quarter of 2011), several of Italy’s banks have been ill prepared to face any near-term financial crisis. In the European Central Bank’s (ECB) late 2014 stress testof Europe’s 130 largest banks, nine out of the 25 failing banks were based in Italy.

Banca Monte dei Paschi di Siena (BMPS), Italy’s third-largest bank and possibly the oldest bank in the world, failed the test as its loan portfolio continued to be plagued with nonperforming loan assets, a problem that several Italian banks have shared. Over the years, BMPS has been forced to close hundreds of branches, cut thousands of jobs (more than 8,000 to date), and sell off less credit-worthy loan assets to strengthen its balance sheet. These moves helped the bank return to profitability in mid-2015 after nearly four years of losses, but the ECB maintains that BMPS will need to be bought by a more stable institution as the bank is still not strong enough to stand on its own.

European banks doing business in Russia and Ukraine have been feeling the effects of economic and geopolitical turmoil after Russian President Vladimir Putin’s military encroachments. Raiffeisen Zentralbank (Europe’s second-largest lender and Austria’s third-largest bank), for example, took a net loss in 2014 after suffering from currency depreciation in both the Ukranian hryvnia and Russian ruble, and after having to increase its provisions for impairment losses on loan assets from both countries.

I could talk about many other countries with troubled banking industries around the world right now. India’s banking industry, for example, has been suffering from a slowing economy and a growth in nonperforming loan assets as corporations have added unhealthy levels of debt to their balance sheets. China’s economy is slowing and is facing one of the worst stock market declines in its history. Japan has been struggling to get its economy out of its near-deflation problem for years. Puerto Rico teeters near default on its debts. And the list goes on and on.

The bottom line is that even though it’s been more than six years since the financial crisis, many banks around the world are not out of the woods yet. Prospectors and entrepreneurs looking to offer their services to international banks would be wise to seek out large, well-capitalized banks with diversified businesses across several countries, such as JPMorgan Chase, BBVA, Barclays, or Credit Suisse. Though many large banks continue to be mired in lawsuits, those problems may be seen as relative speed bumps compared to the larger economic problems going on around the globe.